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Bharti Infratel IPO: What brokerages are saying

December 10, 2012

(Any opinions expressed here are those of the author, and not necessarily those of Thomson Reuters)

Bharti Infratel’s initial share sale will likely be India’s biggest in nearly two years and key for the country’s troubled telecom sector, which has been hit by regulatory flip-flops.

Price Band: 210 – 240 rupees/share

Issue opens, closes: Dec 11 – Dec 14

The share sale of the telecommunications tower unit of top Indian phone carrier Bharti Airtel Ltd will raise $825 million in the upper end of the price range. The sale comes amidst signs of a revival in the primary market with other smaller private offerings like CARE Ratings, PC Jewellers and Tara Jewels in the process of raising or having recently raised capital.

The sale will also be a test of bigger offerings as the government aims to raise roughly $1.2 billion by selling shares in miner NMDC Ltd, sources told Reuters.

Here’s what some brokerages are advising investors on the Bharti IPO:

Ambit Capital:
* Advises investors to avoid at current valuations. At 10-12x FY14 EV/EBITDA and 38-44x FY14 earnings, cites expensive valuations.
* Valuations are fair compared to global peers, but peers such as American Towers and Crown Castle enjoy superior economics.
* Revenue growth expected to slow down on a drop in tenancies, weak uptake in 3G/4G services.

* IPO grade of 4/5 indicating fundamentals are above average.
* Network expansion by India’s leading telcos – Bharti Airtel, Vodafone and Idea Cellular Ltd will work in Bharti Infratel’s favour as these top three telcos by revenue are its clients.
* Large-scale operations, first-mover advantage and pool sharing arrangement among the top three telcos have resulted in better-than-industry tenancy ratio for Bharti Infratel which is expected to improve further leading to high operating leverage and improvement in profitability.

Religare Institutional Research:
* Valuations at higher end of IPO band are not cheap given near-term growth outlook.
* A key risk is a potential leveraging of the balance sheet to expand inorganically internationally.
* Advises investors to apply at mid-lower end of price band.

Enam Securities:
* The expansion of services in relatively underpenetrated markets like Category B & C circles by telcos provides a significant opportunity to BIL.
* BIL and Indus have long-term master service agreements (MSAs) with tenant telcos, which generates stable cash flow in the form of tower rentals as well as provides revenue visibility for the company.
* Marquee investors like Compassvale (wholly owned subsidiary of Temasek), KKR Towers, Nomura will continue to hold major shares in BIL even post-IPO.

Angel Broking:
* Avoid IPO on premium valuations.
* Low asset turnover, minimal use of leverage in a capital intensive industry has resulted in low return on equity, or RoE, over past three years.
* The overcapacity in the industry is expected to limit the demand for rollout of new towers.
* Further, regulatory changes and the resultant uncertainty pose a risk to telecom players as their network rollout plans could be hampered.

(Compiled by Subhadip Sircar)

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